Interest Rates - Do they need to rise further?

Hi all,

Just driving in to work this morning and overheard over the radio that as a result of the huge surge in the oil pricing overnight, inflation may be under pressure again and the RBA may have to consider raising interest rates again. I am by no means an economist, but this line of thinking by the RBA just strikes me as absolute madness.

The stated objectives of these interest rate rises are to curb spending and therefore put downward pressure on inflation and to remove excess liquidity in the economy. AFAIK, the main driving pressures of inflation for us have been the cost of fuel as well as the effects of the drought (driving up food prices etc). Both of these reasons have the exact same effect as interest rate rises in so much as it curbs spending because there is less room in the family budget for discretionary spending – exactly the intended effect of an interest rate rise. In addition, families in Aust have absolutely no control over these two issues and as a large portion of the CPI increase is attributable to these 2 issues, one would have to ask just how effective the RBA thinks its monetary policy is in containing inflation when its targeting families that have contributed a minor role in the overall CPI figure. Part of the solution to any problem is the correct identification of the problem and it seems to me that the RBA has missed the mark on this one.

Instead of seeing both these developments as assisting it in its objective of curbing spending, it sees them as problems that needs to the corrected by further interest rate increases. So the mums and dads out there are having their candles burnt from both ends. In light of global economic events, whereby everybody else is relaxing interest rates to try and weather the financial storm, our RBA is contemplating raising them further even though there are other factors at play that are having the same effect . Australia belongs to the overall economy and will at some stage need to confront the international economic storm, but we face the possibility of being in a bruised and battered state when the crunch time comes.

My question – Does the governor of the RBA know what the Fxxx he’s doing ????

Re: Interest Rates - Do they need to rise further ?

There are some people that believe inflation targeting doesn't work - most notably a chap by the name of Joseph Stiglitz (google his name, their are plenty of articles) who has a Nobel prize in Economics.

My feeling is that if we are following a policy of inflation targeting and inflation (including food, energy) is outside that band, interest rates should go up. That said, perhaps we should be readdressing the entire policy of inflation targeting and the bands that have been set.

All that said, it doesn't surprise me that stories like this are surfacing in a climate of rising interest rates.

We are led to believe that the interest rate rises were/are necessary to curb inflation. The real reason for the reserve bank needs to increase rates is to maintain the flow of overseas money into Australia to fund our ever increasing current account deficit. The higher the rates the more attractive we are to overseas money. The best way to help keep interest rates down would be to BUY AUSTRALIAN MADE.( if you can find any)